Growth At a Stupid Price (GASP)

Romano Sala Tenna

Katana Asset Management

I have to GASP when I look at the current valuations of some of the new generation disruptors; we are very clearly in bubble territory. And as with all bubbles, we don’t know when it will end but we do know what happens when it does.

Case in point – but by no means an orphan - is Wisetech Global Limited (WTC).

Consider the most recent result, and the consensus analyst forecasts (courtesy of Bloomberg), for the coming 3 financial years.

To begin with, 55% EPS growth this FY is an extraordinary number, particularly in light of the more modest 28% growth achieved in the 2017FY.  But putting that aside, let’s think this through for a moment.   

If WTC is able to achieve the extraordinary feat of growing its earnings at 55%, it will still be trading on a PER of 95.5x – and no that’s not a typo. If in the following 2 years they are able to grow at consensus of 36% and then 24%, then 3 years from today WTC will still be trading on a PER of 57 times. This is more than 3½ times the current market PER.

And this, I’m afraid, is simply madness.

Even on the growth investor’s favourite metric, the Price to Earnings Growth or PEG ratio, WTC is trading on an average of >2x for the coming 3 years. A PEG of <1 is normally considered attractive for a high-growth stock.

Stocks such as Afterpay Touch (APT) are on even more unlikely metrics, relying on EPS growth of 210% to achieve a PER at the end of this financial year of 129x! 

I’m sorry, but it’s time to call this out. If the emperor is wearing clothes, then they’re made of glad wrap.

The question then arises, if valuations are clearly as stretched as this, how does a cross-section of the market find itself in this predicament? 

In our view, the (last) GASP trade is being driven by a variety of factors including the belief that supernatural growth can continue indefinitely, late to the party index/passive funds being forced to build their weightings, and of course a large dosage of FOMO. 

And over the past little while, gazumping all of these factors has been a return en masse of the momentum trader. The danger with momentum trading is that rising prices reinforce the belief that one is right, which leads traders to increase the conviction and size of the trade. This ‘unvirtuous cycle’ works until it doesn’t, at which point the fall from grace can be precipitous.

To be clear, we are not challenging the quality or validity of the Wisetech model.   What we are challenging is the level of momentum and price appreciation that has occurred.

It may be unfashionable and the prices may appreciate further in the short term, but over the medium term, investors who blindly chase rising share prices will be forced to pay the piper.

 


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Portfolio Manager
Katana Asset Management

Katana Asset Management was founded in September 2003 as a boutique investment management firm. Katana employs an all opportunity investment mandate being style, sector and market cap agnostic.

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